This was the Hayek Memorial Lecture that I gave at the Austrian Scholars Conference. It is based on Chapter 3 of my dissertation [.pdf]. (BTW early in the lecture I get a laugh at the expense of my dissertation committee. Let me say for the record that my chairman–Mario Rizzo–understood what I was saying. But some of the other guys didn’t.)

In this video I flirt with Keynesianism, though in terms of his analytics, not policy recommendations. Don’t tell Krugman.

6 Responses to ““Pattern Coordination and the Theory of Interest””

I really wish I could take the class. However, a newborn, for many reasons, precludes my participation. Great to hear that it is off to a good start! I will be on the look out for more classes in the future.

While your topic is very interesting, I disagree with your statement that ‘interest has to do with money’.

From an Austrian perspective, while it’s true that return on money rent is interests (although a subset of the time markets), the whole point is that the interest exist in a barter economy too.

If I lent my orange to someone, and get a return from them in a year, a component of that return is interest payment.

That you make an example where the value of the good (orange) varies over time only means that it will not be possible to distinguish the interest component vs the orange price variation component from the return.

You have the same problem in a barter economy where some store keeper can’t calculate its profit or loss because without money prices, he can’t figure out if his heterogeneous inventory is worth more or less than the previous time period.

The whole point is that his loss or profit exist, but he can’t calculate it. Same issue in the socialist commonwealth pointed by Mises long time ago.

So the problem with coming up with a measure of the interest rate in a barter economy isn’t an interest theory problem, it is the general economic calculation problem for in an economy where money prices do not exist.

Then, you have the same problem in a money economy where the value of the money unit changes over time: How can you calculate the interest rate component vs the price premium? General price level approximations are obviously flawed as you know very well.

“A lot of what Keynes wrote in the General Theory is real deep stuff.” Do you still have your kneecaps?

On a more serious note, I went to see if your claim that Keynes’ argument against interest theory was Misesian was brought up in Hazlitt’s “Failure of the New Economics”. But I came up to this point, on page 192, where Hazlitt says:

“If Keynes’s theory were right, then short-term interest rates would be highest precisely at the bottom of a depression, because they would have to be especially high then to overcome the individual’s reluctance to part with cash… But it is precisely in a depression, when everything is dragging bottom, that short-term interest rates are lowest.”

Hold on. I’m just a snot-nosed kid, so I’ve learned most of my Austrian econ from Huerta de Soto’s book The Austrian School (highly overlooked book IMO) and your Mises.org articles. And my understanding of time preferences w.r.t. the interest rate is that they are directly proportional. So it would seem to me that at the bottom of a depression, where everyone is unemployed and there are no jobs to do, people would have very high time preferences, and therefore interest rates would be highest.

It’s not so much that Hazlitt is wrong–after all, on the surface that seems like a devastating critique to the liquidity preference explanation of interest rates. But as you point out, it’s equally as devastating to the time preference theory. Shooting from the hip, I think what’s happening is that back in the day, since busts were associated with monetary and credit deflation, the price premium component of the nominal interest rate fell as well. But e.g. during the 1980s recessions, you certainly had high interest rates amidst the bust.